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With so many indicators on the market, question arises how to select
and organize them.
First most important point is what kind of indicator is that: lagging
or leading.
Moving average crossover is a lagging indicator, based on physicality
of the market. It triggers when emotion of the crowd already reached
its heights. It creates the illusion of confirmation and safety, but
in reality produces lousy to average results in most cases. That's
true; code could be optimized to certain extent, but will never get
perfect by definition. What I want to say, there is certain
psychological make up built by those techniques in the industry. And
those lousy trading habits are strong and often stand on the way of
accepting new concepts.
Now if we take Hurst channel, it projects nearest future, instead of
just reacting to the nearest past. So it is qualitatively different
and requires different habits, different thinking - Trading ahead of
the market not after it moves. That's what I arrived to. With Hurst
Channel, Gann lines, may be Astrology and other predictive techniques
it becomes possible, because indication is based on a pure concept,
not on a secondary physical trigger. Channel spots the hot area of
the cycle, then smaller time frames and other projecting techniques
are used to narrow the entry. So far I managed to narrow it to $0.5-1
on individual stocks. Most of the time within 50 cents. What I do, I
make few price projections in a hot spot area within a $1 range and
then watch 5 and 1 min chart momentums (MACD, BollingerB) to decide
which one is going to play out. Sometimes it goes against me and I
have to sweat, but not much. Usually it gets resolved within an hour
and I smile for the rest of the time. I also use lagging and
confirming indicators to decide if I want to stay longer and if
position is strong or is it better to reenter at a better price or
time. But having the advantage of catching a top or a bottom reduces
losses and sweating periods. Most trading books don't recommend
trading tops and bottoms, but they also don't carry sufficient
knowledge for good planning.
If you compare it to a break out entry, breakouts are tempting; they
look like everything goes in your favor. Wrong, most of the time
breakouts correct itself and go against you. Distance between Entry
and stop point is huge. No room for break even. Sweating time is
bigger. It really sucks.
So, there is psychology involved:
1.Well-planned entries are scarier at first look (require courage),
but better in terms of return and general well being after.
2.Break out (confirmed entries) are more tempting and appealing, but
less favorable as later appears.
So what I refer as "courage" is courage based on intelligence of
recognizing phenomena of trading psychology, that our senses aren't
perfect, they can delude and put us on a wrong path.
Conclusion: it is better to use good quality conceptual - predictive
indicators as primary; instead of lagging even they are of the best
quality. Lagging could still be used for trailing stop purposes and
target confirmation, but not as trading triggers on its own.
That's my trading philosophy if you wish - projecting into unknown.
Acting first, rather then reacting to someone. That's what trading is
about and should be treated as such.
Hope this explains you few things.
Greg.
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